The Role and Influence of Russian Ruble in Recent Russian Economy - Case Study Example

The Role and Influence of Russian Ruble in Recent Russian Economy The Ruble is the official Russian currency that has not only contributed considerably to the Russian economy, but also has had a huge influence on the economy as well. The current ruble is the seventh from a series of incantations that the currency has evolved largely due to drastic changes in its value. The first ruble existed over 200 years up until 1921 when its value fell leading to the introduction of the second ruble in 1922 (Ward and Clayfield). A year later, a quick denomination followed, which was swapping at one new ruble for 100 old rubles. The forth denomination also called the gold ruble made an entry in 1924 and ran through 1947 with its one ruble equivalent to 50,000 rubles of the third incantation (Ward and Clayfield). The sixty took center stage on from 1961 through 1991 with a maintained value as that of 1947. However, following the fall of the Soviet Union in early 1991, the ruble remained the legal currency of the Russian nation (Ward and Clayfield). During the post-soviet period, the Russian ruble experienced varied value, sometimes appreciating and depreciating at other instances. The period of 1992-98 presented an era that was characterized by financial and economic volatility together with the hyperinflation of 1992-1994 and soaring inflation of 1995–1998 (Korhonen and Mehrotra). The ruble experienced turbulence and weakened confidence among Russians majorly due to unrelenting inflation leading to more dollarization of the Russian economy. Throughout this period, the only monetary policy that existed was the exchange rate oriented. Midway in 1995, the central bank of Russia introduced a corridor exchange rate to strengthen the role of the ruble as the ostensible policy security (BIS Paper). However, these efforts to stabilize the exchange rates by the Russian government did not bear fruit, and it resulted in the government resorting to foreign lending to finance its recurrent deficits. What followed was a severe political and economic crisis in August of 1998to the, which led to the depreciation of the ruble and default on international and local debt (BIS Paper). The devaluation of the ruble and debt crisis in general prompted the Russian government to reallocate to a managed floating exchange rate. This exchange policy worked in restoring confidence in Russia’s financial system during post-crisis era and this led in dampening the influence of volatile goods prices on the economy (BIS Paper). Throughout this period, the fiscal policy maintained acceptable of discipline. For instance in 2001, the government budget had an overall budget surplus of about 2.4% of the gross domestic product. This was imperative for it was the first time in the Russian history; the following year’s budget was calculated with a surplus of 1.6% of GDP (BIS Paper). This paper is an analysis of the Russian Ruble in terms of its role and influence in the recent economic events especially the post-crisis period of between 2002 and 2014. The major events of the period include the 2002-08 economic events period of rapid growth, 2008-09 recession events, 2014 economic sanctions events, and the 2014-2015 Russian bank economic plan. Role of the ruble on Russian economy Russian government uses the ruble for making a number of transactions, for investing in Russian stocks and keeping the rubles in the reserves. Although not so dominant, firms and individuals around Asia especially the China, Belarus and some parts of eastern Europe often use the ruble for two major purposes. First as a tool that gives them the capability to purchase Russian products and services (Russian exports), and secondly, as an instrument for purchasing the Russian financial inflows such as real estate, financial assets, bonds, and other stocks. Correspondingly, Russian residents deliver ruble to the foreign exchange marketplace through the purchase of other currencies in exchange for the rubles to be able to purchase foreign services and products imported into Russia. This is also done to enable Russians to have the capacity to procure financial outflows such as financial assets and stocks and real estate’s among other investments situated outside Russia. The Russian ruble also played a critical role during the post-crisis period and especially after the evolution of the regime of monetary policy. Unlike during the 1998 crisis, currently Russian individuals and companies have embraced financial institutions resulting to the re-monetization of the Russian economy (Korhonen and Mehrotra). According to Iikka Korhonen and Aaron Mehrotra in their journal on Money Demand in Post-Crisis Russia, their study reveals a number of functions of the ruble in current events. The functions of the ruble include being used as the instrument for forecasting on inflation, measuring ambiguity in desire response changes, and assessing the value of information from the actual ruble money breach (Korhonen and Mehrotra). All this functions are paramount taking into account the use of the ruble in the performance of monetary policy. From the study, they also identified that the ruble plays a role in exchange rates whereby the ruble/ dollar is used for opportunity cost terms. The reduced reliance on exchange rate interventions as the primary tool of monetary policy in recent times has led to the ruble gaining value resulting to the overall de-dollarization increase (Korhonen and Mehrotra). Other functions of the Russian ruble include its role in competitive domestic market and foreign market. The ruble’s appreciation influence on the domestic sales triggers a number of reactions. For instance, the appreciation of the ruble leads to the fall o prices for Russia’s imported raw materials and components hence leading to increased demand for the imported goods, which to ultimately lead to the plummeting of the net exports (Blank, Gurevich, and Uliukaev). Apparently, this economic upshot is positive to the Russian economy in every way: it leads to improved spending and savings, while concurrently mounting the prospective market for the traded and non-traded products and services (Blank, Gurevich, and Uliukaev). Moreover, the appreciation of the Russian ruble lowers the comparative costs of imports, to imports, hence leading to better balance of payments. Consequently, in circumstances of flawed competition, th increased Russian imports can be combined with compact spending when the import order is price-inelastic (Blank, Gurevich, and Uliukaev). This is exactly the events that followed the 2008 crisis. 2002-2008 Economic Events This is the post-crisis period where several economic events were witnessed as the Russian economy bounced back. What led to a quick recovery was the devaluation of the ruble for in increased both local and global competitiveness of domestic producers. The five-year period from 2002 through 2008 was characterized with initiations of a number of economic reforms aimed at growing the economy (BIS Paper). The major reform was the introduction of a comprehensive tax that brought in the 13% flat income tax together with other deregulation efforts, which lead to the growth of business. For instance, between 2002 and 2006, the consumer credit volume grew to about 45 times and this fuelled private consumption boom (BIS Paper). Consequently, the level poverty dropped from about 30%in 2000 to about 14% in 2008. Generally the period of between 200 and 2008, the Russian economy grew immensely with the devaluing of the ruble that further led to prices of commodities escalating (BIS Paper). 2008-2009 Recession crises The 2008-2009 crisis is another event that witnessed the discrepancy in role and influence of the ruble. The exercise was a consequence of consistent mismatch demand and supply of the household foreign exchange marketplace, which was brought up by tax revenue transfer to sovereign funds from the minerals export (BIS Paper). Within this period also was the global financial crisis that fronted a sharp shrink in oil prices. This further eroded the ruble’s value sharply and triggered huge capital outflows putting the ruble into immense pressure. Towards the end of 2008, the ruble had considerably weakened against major currencies especially the dollar, and this led to the crumpling of the Russian stock index almost to the ground (Blank, Gurevich, and Uliukaev). In order to maintain a sustained exchange rate, the bank of Russia had to buy up its ruble with foreign reserves and this further lead to the depletion of the foreign reserves. What followed was the escalation of prices of foreign goods and services while the domestic services and goods became cheaper. Moreover, as Russian industrial production declined, the unemployment levels shot up leading to isolated prevalence of civil unrest within the country. The pressures together with capital flight escalation, forced the Russian government to change to an extensive economic stimulus program, which resulted to an injection of over $200 billion into the Russian economy (BIS Paper). This response by the bank of Russia was aimed at moderating the ruble’s depreciation but what followed was a more threatening trend that put a huge strain on balance sheets of households, banks, and firms. Such was because of the huge debt of the foreign currency that these institutions had borrowed. The role and influence of the ruble were again down almost to the 1998 crisis. However, in the periods of November 2008 and January 2009, the Russian government allowed gradual depreciation of the ruble through the broadening of the dual currency basket (BIS Paper). In addition, the Bank initiated several domestic and foreign exchange interventions aimed at slowing the rate at which the ruble was depreciating and, therefore, allowing the economy some time to adjustment to these changes (BIS Paper). In curbing the capital outflow, slow ruble’s devaluation and avert domestic financial markets instability, the bank increased interest rates progressively together with a range of additional actions. Financial institutions were advised to sustain stable levels of net foreign assets and currency situations, and their adherence of these proposals allowed individual banks gain access to the Russian Bank’s unsecured loans (BIS Paper). Further, these interventions led to a steady shift to a further flexible ruble exchange rates, hence, facilitating institutional efforts to adjust the mounting ruble volatility. This promoted a sustained de-dollarization and made domestic, foreign exchange deposits and cash purchases changes less susceptible to ruble exchange rate as was witnessed at emergency of the crisis. In addition, it also helped at easing volatility in ruble markets rates and thus, strengthened the interest rate channel of monetary policy to 2013-14 (Nabiullina). With a stable ruble in spring of 2009, oil prices ascended back from the low end and attained at start of the year as the global shock of the crisis relieved. Even though experts predicted that Russia will still feel the pressure of the crisis in the aftermath of 2009, the country maintained a modest growth in the successive years to 2014. The pace and trajectory of Russias resurgence are highly dependent on the readiness of Russian policymakers to spread their income streams and initiate the desirable economic and financial reforms (BIS Paper). The ruble has held strong and played a critical role in checking the inflation level. However, in 2014 the country witnessed a range of economic events in terms of sanctions that has seen turbulence of the currency. The Crimea annexation event In the wake of the sanctions against Russia by western countries over its stake in the Ukraine tussle, the ruble’s role and influence got into turbulence. What followed is plunging of the ruble, escalation of prices and economic worries hitting on Russia as to the sanctions issued by the United States and European Union (Wall Street Journal, 2014). For instance in September 2014, the ruble traded at an average of 38.3 thus setting very low historic standings of almost 19% fall since the start of the year 2014 (Wall Street Journal, 2014 ).The range of sanctions issued by the US and Europe were against the number of financial institutions such as banks, Forex agencies and other companies. The sanctions were aimed at cutting the institutions off from the western financial markets. For instance, the royal bank of Scotland restrained it lending to Russian firms while the Dutch bank also reduced its Russian loaning book. The major reason for these sanctions was due to claims by Ukraine government that the Russian troops are helping the rebels on the Crimean peninsula (Wall Street Journal, 2014). Despite the Russian government denying these allegations, the sanctions went on, and this led to a credit crisis for financial institutions as they try to remit payments for the foreign debts (Arutunyan). With the isolation Russian banks from the credit markets, the country has witnessed huge domestic buying on the domestic market, and this is likely going to drive up the dollar and the euro. According to Alexander Golovtstov, who is the head of the UraSib asset management, such huge domestic buying will require the Russian government to pump about $150 billion to compensate for the isolation (Arutunyan). This huge dollarization exercise will definitely lead to devaluation of the ruble. The devaluation of the ruble was immediately felt within and outside Russia, and the effects on the economy are prevalent. Prices of products continued to increase, and this is after the central bank of Russia reacted by raising the interest rates to stem the ruble’s slide (Wall Street Journal, 2014). Bank of Russian ruble plan of 2014-2015 inflation targeting regime Since 2013, the central bank of Russia has initiated plans to increases the elasticity of the ruble exchange rate system with a view of creating the necessities for complete changeover to let a ruble floating exchange rate system by 2015 (Nabiullina). After making this move by 2015, the bank will have to abandon the exchange rate based on the pointers for its new exchange rate policy. However, even by then, the right to make interventions especially in domestic exchange markets will still be the under the control of the Russian central Bank and these will be for the rationale of managing liquidity in the financial sector (Nabiullina). This monitoring was evident, for example, in September-October this year (2014). Some tension was experienced by the domestic, foreign exchange due to the inability of the banks to manage the FX liquidity on the wake of restrictions to access capital markets issued against Russian companies by the USA and European Union. In mitigating the pose risks and restore stability in the foreign exchange market, the Russian bank initiated two new foreign currency operations, i.e. “the sell USD and buy RUB FX swaps and auctions” (Nabiullina). Despite the endeavors to let a ruble float by 2015 on the run, this plan’s measures are proving futile (BIS Paper). As per the article on the Wall Street of October 31st 2014, the bank lifted up its yardstick interest rate from 8% to 9.5% in an endeavor to end a run on the ruble and restrain inflation; however the ruble fell even more despite the rate hike. The ruble’s value has continued to drop sharply as from September this year to about 22% (Wall Street Journal). Further, the article indicates that the sharp decline is like to be caused by a number of reasons. Historically, the ruble exchange rate has correlated to the price of oil, and recent dollar cost of oil decline can be the reason for the fall of the ruble. Another reason for the weakening is obviously the sanctions by European countries and the US in rejoinder to Putins ravages in Ukraine (Wall Street Journal). The sanctions have led to liquidity of the dollar in Russia, thus making firms struggle in finding new foreign exchange and save the dollars they stocked. The convergence of a weakened ruble and low oil prices are likely to cause havoc on Russian economy and further restrain its mission to achieve an inflation targeted regime by 2015. With the progressively more isolation of Moscow in its confrontation with the West nations over Crimea region, President Putin has pressed for superior economic self-reliance for example, ordering the creation of a state-run electronic cash transfer system. The implication of the initiation is Russia will no longer depend on Visa payment system or MasterCard system. This came as a reaction to these companies action of restricting their intercontinental payment systems for the Russian financial institutions and bank that sanctions were imposed upon. This will in turn led to the ruble gaining dominance, as it will be the official currency to be used on the new Russian electronic money transfer system. Conclusion Conclusively it is evident that a rallied round by the Russian economic institutions in adjusting to the emergent ruble has seen a steady shift from a devalued to a flexible ruble exchange rate thus promoting sustained de-dollarization. Such initiatives have made domestic, foreign exchange deposits and cash purchases vibrancy become less susceptible to ruble exchange rate dynamics (BIS Paper). The role of the ruble becomes obvious in the post-crisis period is extensively ranging from stipulation of purchasing potential to appreciation roles. Some of the roles include provision capability for purchasing of the Russian financial inflows such as real estate, financial assets, bonds, and other stocks. They also used the ruble in the forecast on inflation, measuring ambiguity in desire response changes among other functions. Major economic events in the recent decade have seen serious undertaking by the central bank of Russia. For instance, the transition of exchange rates intervention controlled regime to the monetary policy regime and to the anticipated ruble floating exchange rate by 2015. The various economic events are within the range of between the period from 2000 to date, and the most turbulent one are those of 2008 recession crisis and the recent Russia –Ukraine that show sanctions. The sanctions therein led to destabilization of the ruble where it lost its value leading to the bank of Russia increasing interest rate to curb depreciation of the ruble. Despite these turbulences in recent economic times, the governments of Russia together with the bank of Russia are initiating continual efforts to ensure that full float exchange rates prevail by 2015. Fruition of these endeavors means a more strengthened ruble in terms of roles and influence. However, this will depend on the economic and political decisions that they are going to made by financial institutions, and the government of Russia and only time will tell. Works cited Anna Arutunyan, Special for USA TODAY. Sanctions Hit Russian Economy As Ruble Plummets. Usatoday.com. N.p. Web. 2014. http://www.usatoday.com/story/money/markets/2014/09/16/russia-ruble-plummets-economy-sanctions/15718187/ [Accessed 15 Nov. 2014]. BIS Paper. The History of the Bank of Russia’S Exchange Rate Policy. 1st ed. Moscow: BANK OF INTERNATIONAL SETTLEMENTS. Pdf. Blank, A., E. Gurevich, and A. Uliukaev. The Exchange Rate and Sectoral Competitiveness in the Russian Economy. Problems of Economic Transition 50.1 (2007): 27-52. Pdf. Korhonen, Iikka, and Aaron N. Mehrotra. Money Demand In Post-Crisis Russia: De-Dollarization And Re-Monetization. SSRN Journal, n.d. page. Pdf. Ward, Eleanor, and Caroline Clayfield. History of the Rouble - Roubles.Com - Russian Rouble News - Рублей. Roubles.com. n.d. Available at http://www.roubles.com/ [Accessed 15 Nov. 2014] Wall Street Journal, The Run on the Ruble. N.p. Web. 2014. Available at http://online.wsj.com/articles/the-run-on-the-ruble-1414971034 [Accessed 15 Nov. 2014]. Read More